What Percentage of Payroll Vs. Income for a Small Business?

by Jake Wayne, Demand Media

Controlling payroll is important to small business success.

dollars in hand at teenager image by Petr Gnuskin from Fotolia.com

Although high revenues are a great thing, a small business must watch its "back door" if it wants to be sustainably successful. This means keeping expenses as low as possible by continually reviewing how much you spend on different departments, and adjusting if they get too high. Employee wages are an area where many small businesses hamstring themselves by paying too much in comparison to how much those employees bring in.

Payroll vs. Income

Payroll as a percentage of income is one way to gauge whether or not your business is spending too much on payroll. To do this, you need to total your payroll expenses and add up your gross income. Divide the payroll total by your gross income to express your payroll as a percentage of income.

Ideal Percentage

According to experts including master restauranteur Gordon Ramsey and small business advisers Second Wind Consulting, your business should be all right if you are spending approximately one-third of your gross income on payroll. Spending more means you're not making enough profit, or unable to make investments to support the business. Spending less means you might lose your best employees because you're paying them too little.

Exceptions

Those numbers work well for businesses that manufacture a product. However, you can afford a higher percentage for payroll if you run a service business. Service businesses don't have materials costs, and thus have more room to pay their staff -- who are essentially their product. Even in service businesses, Second Wind Consulting recommends keeping payroll below 50 percent.

Earmark Model

Earmarking is another way of tracking payroll and other expenses to make certain they don't get out of control. Rather than expressing this as a percentage, it instead tasks a single department -- such as food service in a restaurant or the pro shop in a golf course -- with making enough money to cover payroll. The billable hours model and commission sales model are other examples of this concept, with each employee paying for his own payroll out of the money he personally generates.

About the Author

Jake Wayne has written professionally for more than 12 years, including assignments in business writing, national magazines and book-length projects. He has a psychology degree from the University of Oregon and black belts in three martial arts.

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